You follow every instruction out there, but yet your results are still lacking from what you would want to see.
If you’re reading this blog post it’s because you’re not giving up.
You’re looking for better techniques to help you trade penny stocks successfully.
If that’s really so, keep reading as I will share with you some of the things you’re doing which you should stop doing.
Trading penny stocks is already a hard task. Not doing it the correct way can make it even harder on you.
Unfortunately, not everything you read on the webs is right. You have to know which ones to absorb and apply to your day trading, and which ones to ignore and never use.
Because some of them are great advises while the rest are completely trash.
While this post is not a long one, I’ve decided to share some of the most common mistakes traders like you are making every day.
Let’s get started…
1- Trading penny stocks that are skyrocketing on high volume
We’ve heard this on so many occasions; “It’s a good sign to buy stocks when the volume is increased.” Is it really the case in penny stock trading?
Well, it’s a good practice to buy stock with mid to high daily volume, but when a stock’s volume drastically increased, it could be a not so good sign as well.
The daily volume does not mean the number of traders who buy the stock, it’s rather the number of shares that were bought.
High daily volume could be the result of just a hand full of traders, or it can be due to a very large number of traders. If there’s a news-release and the volume has gone up it may be a good sign for you to get on board.
Contrary if there’s no news, you just see the volume going up without any given reason then you should question yourself before you make your move.
2- Enter position on a stock thinking that it won’t get any lower
Another mistake to refrain yourself from making is buying stocks that have decreased very low in price and say to yourself that it will not be decreased any lower.
This is a recipe for big losses. The reason is because you can never predict the fate of a stock 100 percent. If someone tells you otherwise he/she is not being truthful.
It’s not possible to do such a prediction without any doubt.
So many penny stock traders have the habit of letting a stock price reach rock bottom before they enter some positions.
Sometimes they get lucky, but most of the times the lose their money. You think they would learn from this mistake?
Most of them never change, they get
stuck on applying this same principle and hoping that the price goes back up once they’ve bought their shares.
3- Buying stocks that are trading below book value as cheap stocks
According to Investor Words, “A company’s common stock equity as it appears on a balance sheet, equal to total assets minus liabilities, preferred stock, and intangible assets such as goodwill.”
Book value is what a company’s stock really worth. It’s the actual value of the stock with no other costs that are needed to be deducted.
Some traders utilize this specific stock’s value to make their decisions. Is this a good approach?
Read on to find out!
Price/book (ratio) of below 1 may be cheap but one should see other aspects such as earnings forecast, guidance, management and debt on the books of the company.
Says Angel Broking’s equity derivatives head Siddarth Bhamre.
One thing to keep in mind, there’s book value and there’s also market value. Market value is the value of the stock given by the stock market. While the book value is the value of the stock given by the income statement the auditor.
In essence, they’re two different things but they both have been put in use by stock traders.
What’s wrong with using a stock’s book value to make your decision?
The book value of a stock may not depict its true value to a potential shareholder. It’s because the debts of the company are usually un-acccounted for.
Nonetheless, many stock traders don’t take this fact in consideration.
You have to know when it’s a good time to use book value and when it’s not worth it. The income generated by the company assets could be a good thing for you to look at.
Sometimes, the book value numbers that are made available to the public may not be the same as the book value recorded into the company’s book.
This can also affect your analysis when trying to valuate a stock.
Sham Gad, Investopedia Writer states:
A company that can generate a relatively high income level from its assets will typically possess a market value that’s far higher than its book value.
In a case like this the book value should not be used because the market value is more profitable. The mistake that many stock traders make is not paying attention to that.
Stock trading is a wonderful way to invest and make profits. But learning to do it the effective way is a must, specially if you’re trading penny stocks
There is very little room for errors in penny stock trading; therefore, you need to be very careful as of which analysis you’re using.
If you do a little research on penny stocks’ myths, you will find so many of them. It could be in your advantage to know as many of those myths as possible.
Having such knowledge could help you not to make those same mistakes other penny stock traders out there are making.